pockets, but we may be losing our competitive edge. some say it's because america's fragile economy is a distraction for corporate america. others point to our inferior infrastructure and sub-par public education. but adam segal, author of "advantage," says the big problem is others are gaining ground. >> we have been kind of running in place for the last three or four years because of the recession, spending on r&d, and big ideas seem to be fairly scarce while china just continues to funnel more and more money into it. >> reporter: still many argue the u.s. will always be extremely competitive because we are the most innovative country in the world. what better place to witness innovation at work than at i.b.m. in westchester county, new york. this is the home of watson, big blue's super computer. watson was clever enough to beat "jeopardy" champions at their own game just a few years ago.

now, i.b.m. researchers are working on new uses for the brainiac computer, particularly in the field of medicine. bernie meyerson calls himself i.b.m.'s head geek. he says innovation is critical for companies and societies to survive and thrive. and yes, there is a magic ingredient. >> continuity. in the down cycles of the economy, the temptation is always, "well, we'll just cut the front end, we won't do our research, we're not going to work on development." so you empty the pipe. then, when the economy turns-- and it always turns-- when that economy turns, you have nothing in the pipe, and people run you over out of the gate. >> reporter: but, not all innovation happens in multibillion-dollar labs. here in manhattan's fashion district, www.ilikewhatyourewearing.com is trying to ignite a fashion revolution. started by olivia gossett, the web site sells cutting edge clothing by rising designers,

but it's also an online magazine, one that uses cute articles to sell products and foster those independent designers. >> i think we're opening up gateways in the industry for other people that otherwise wouldn't have a chance to make a name for themselves. you know, you see the same dress on four different web sites for four different prices from the same label, and you're left kind of wondering, isn't their more out there? >> reporter: ilwyw.com may not help cure cancer, but it might create jobs. and it's part of a push by new york city's borough president, scott stringer, to make the big apple a destination for start- ups, what he calls the "innovation economy." >> how we take advantage of it will define the economic success of this city at a very interesting time in our history, after 9/11, post hurricane, dealing with infrastructure challenges and budget deficits. and we need to expand our tax

base, and we need to take advantage of what's happening right now. >> reporter: exactly how we take advantage is ripe for debate, but most agree better education and visas for the scientists we train in the u.s. is a good start. and remember what i.b.m.'s myerson said about continuity-- it's just as important to a >> the moment you believe there is no danger of losing your edge is when it disappears on you. >> reporter: suzanne pratt, "n.b.r.," at the watson research center. >> susie: the u.s. needs to make structural changes to restore its competitiveness. that's the main conclusion of an extensive study on american competitiveness by harvard business school professor michael porter. when i talked with him, we began our conversation by discussing why competitiveness matters for the u.s. economy. competitiveness is the coexistence of two things: one is a business environment in the

united states that allows companies based here to compete successfully in the global economy but while maintaining or improving the standard of living of americans. we have to do those two things together to be truly competitive. if business is succeeding by cutting wages, that's a sign we're not competitive. so competitiveness is fundamental not only to companies and business but also really to the future prosperity of american citizens. >> susie: michael, people say that in order for the u.s. to be competitive it has to be a center for innovation. by that definition, how are we doing? >> well, i think the u.s. actually remains a tremendous juggernaut in terms of innovation. if you look at r&d speing in the entire world, we account for by far the largest share of r&d spending. we continue to be a major source of patenting and new companies. but the problem is not so much today innovation, the problem is that our business environment has got sufficiently inefficient

and high cost and cumbersome that we're not able to capture the fruits of innovation. too much of the innovative activity generates manufacturing activity outside of the united states. apple is a gate example. apple until recently is not going to make anything in the u.s., despite the fact that they're a tremendous juggernaut of innovation. so innovation is something we need to keep worrying about, we need to keep renewing it and improving it but ultimately that's not the central problem holding us back right now. >> susie: all right. well, so, to encourage more innovation and to restore competitiveness, what does the u.s. immediate to do? what would you say are the one or two key things we need to do to restore competitiveness? >> number one, we have to open up the immigration of high-skilled individuals to america again. starting with the graduates of our own universities and our own ph.d. program which is we're now forcing a lot of these talented people who li who actually want to stay in america.

secondly, we have to reform our corporate tax code. we have allowed our corporate tax rate to become the highest in the o.e.c.d . other countries will be bringing theirs down, we have been letting ours creep up. our tax code is enormously inefficient, it's riddled with exceptions and loopholes. we're collecting very limited corporate taxes. i think there is a wide consensus we have to reform this tax code. that will have a tremendous impact on how companies think about investing in the u.s. if we can do those two things we would really change the trajectory and sense of optimism in the u.s. economy almost overnight. >> susie: given the intense drama between washington lawmakers and the business community, how do we make these changes come about. >> what's happening in washington is we're just not discussing the things that really matter for the future trajectory of our american economy. we're just not able to reach consensus now to get things done. this, i believe, is our central challenge right now. it's not the opportunity to be

successful, it's not the potential of this country, it's really this gridlock that we have in our society right now which is deeply concerning. >> susie: despite the issues that you bring up and despite the obstacles, you're hopeful and optimistic about america's future prospects. so if five, ten years from now we were to ask the question how is america doing in terms of its competitiveness, how do you think we're going to be doing? what are we going to say about the u.s.? >> well, we have the most precious strengths in the u.s. that matter the most: innovation, a university system, entrepreneurship, a great dynamic country, a great dynamic group of citizens. the things that we have to fix are the basics. they're not hard, they're not rocket science, but we just have to achieve consensus. my optimism comes from the fact that historically america has been willing to face the hard problems, be dynamic, change things, not get stuck in gridlock. right now it's unsettling how

unabler two make progress. but i thi there's an underlying optimism i have that just because of the very historical nature of this country and certainly there's no reason why we can't be competitive. you know, it's really going to be our choice in terms of how we behave, what kind of policies we set, how we work together between business and government and, you know, i'm optimistic that we'll sort it out but, boy, it sure looks ugly right now. >> susie: for more on michaelportier's research and articles go to nbr.com and check out our partnership with some of the nation's top business schools like harvard.

>> tom: while beer wasn't invented in america, u.s. brewers are thinking small to make it big. small craft brewers are claiming a bigger stake of the industry's annual $300 billion in sales. mike hegedus takes us to one small regional brewer on the verge of going national. >> reporter: it is the face of success illuminated by a welders' torch, a german- engineered expansion assembled with bavarian precision. a $10 million project to increase production of-- roll out the barrels, baby, it's beer! this is the lagunitas brewing company operation in petaluma, california, on the edge of bucolic sonoma county pasture land. lagunitas, with 150 employees, is in the sweet spot of the u.s. beer industry. sales by small, regional craft brewers making up for sagging national brand sales. >> it's about people who are alternative thinkers, who just are looking for their own experiences in life. they don't want to be fed from a

tv commercial what it is they want to put in their bodies. beer is one of those ancient personal relationships people will have. this over here, this is malt that comes from alberta, canada. this is the base for making beer. if this were wine, these are grapes that we'd squeeze. >> reporter: tony magee is the c.e.o. of lagunitas. formerly in commercial printing, he started the brand in 1994, made a little home brew and was hooked. today, so are a lot of other people. lagunitas, the name of the small nearby town where magee lived, has a cult of personality that includes brews like harry eyeball i.p.a., cappuccino stout and brown shugga. it does just short of $40 million in sales, will produce close to 240,000 barrels of beer in 2012, and be available in all 50 states by the end of the summer, a summer that will see bands playing at its brewery- based performance venue. >> what you find is that every

craft brewery has its own unique culture, and it's almost, like, a giant family. >> reporter: jeremy marshall is the head brewer, a job that will get a lot bigger soon. by the fall of 2013, this petaluma expansion will be matched by a bigger project: a second lagunitas brewery in chicago, employing about 100. it will jump the company from being the 17th largest craft brewer in the u.s. to number two, right behind boston brewing and sam adams. >> 14 times a week, a semi-truck leaves loaded with beer, headed for either denver, chicago, new york, maine. and so, now, instead of that beer leaving in trucks, it'll leave from chicago. so the difference in freight times 14 trucks, times 52 weeks, covers the debt service on the entire brewery twice over. >> this is new territory right now, the idea that, you know, you can grow and keep your soul. if anybody can pull it off, we can. >> reporter: the lagunitas brewing company, a little

sumpin' wild for everybody. >> in the evening, i know that while i'm going to bed, there are hundreds and hundreds of these all around the country. people are having communion with our business right then and there, taking it into their body. what other product-- besides maybe a cigarette or a communion wafer-- besides a beer, sight unseen, will you just take right in, you know? so, to that... >> reporter: indeed. mike hegedus, "n.b.r.," petaluma, california. >> tom: for many everyday products "made in the u.s." has been replaced with "we signed in the u.s. " taken -l's ipad devices. apple makes the declaration part of its marking, part of its packaging is right there. apple's devices proudly acknowledged the distinction saying "designed in california"

while they asset are are built in china. peter morici is the former chief economist at u.s. international trade commission, he joins us from washington, d.c peter, how does export egg innovation impact our economy here in the states? >> we lose a lot of the good manufacturing jobs. although engineering jobs pay well, manufacturing did pay well in the united states. also, the process of making products is very important when you have a paradigm shift. great example: years ago kodak decided to specialize in film and sent camera making to the far east. then their labs developed a digital camera and they forgot how to make them. in the sense that they lost the ability to manufacture shutters, lenses, things like that. and they missed out on the revolution in cameras, naoko tkabg is virtually out of business. >> reporter: doesn't this movement, this exportation of free innovation free up capital for higher more margin investment here in the states? >> actually not.

essentially, the american capital leaves for china. capital is fungible, movable, americans haveless capital to work with because of it. >> tom: how does american innovation impact countries using it? in china, for instance, you can see a developing middle-class and perhaps more american products going over to china. >> absolutely. and what you see in korea-- dawes because that's a good intermediate step-- is now they're getting dominance in cell phones. first they manufacture, then they develop the engineering that supports the manufacturing, then testify t product development and before you know it you've lost your industry. >> tom: you wouldn't advocate barriers that would keep the kind of innovation tail that you're speaking about here in the states? >> what i do advocate is ensuring that american manufacturing has the same advantages as chinese manufacturing. don't really provide enough incentives for it here and as a consequence it's very easy to leave. whether you're making the chips or the phones it's just more stranges you to be in china these days.

you can get things done faster and the got will subsidize you. in the united states the regulatory burdens are real, substantial, and burdensome. >> tom: well, the big -- the big ability to move business over the china has been, of course, the currency peg that the chinese currency has against the u.s. dollar and the value that that enjoys. certainly that couldn't be a case for the u.s. dollar, could it? >> well, it's sure a case for doing something about the chinese ewe wan. the undervalued currency gives chinese manufacturers a 40% advantage. it's tough to compete with that. that's important. also you need to set up a factory in china with 3,000 people in 90 days. i would suggest it would take about three years here because of all the hoops you have to jump through. no>> tom: you talk about that case in point with kodak and how it moved some of its operations overseas and developed a digital camera but missed out on the digital camera revolution. what is your outlook for american innovation.

certainly the movement of innovation hasn't stifled creativity for u.s. corporations. >> this manufacturing abroad has taken design and engineering abroad with it. look at the cell phone revolution. initially it was a canadian and american phenomena, blackberry and iphone. now samsung increasingly is leading. and you can lose whole industries that way. other industries: the batteries in cars, the manufacturing of the cells. that's something that's coming to be dominated by the asians. hybrid vehicles and so forth. there's a reason those things didn't happen first in the united states. >> tom: american innovation and competition around the world. peter morici with us, he's with the university of maryland. thank you professor. >> take care. >> susie: selling the holidays to the world. mike hegedus found a company

that's thriving despite intense competition from outside the united states, and also making its signature products right here in america. for the barrango corporation, every day is christmas. >> reporter: you wouldn't know it, but what you're watching is american ingenuity on display for the whole world, a blueprint to recovery for u.s. manufacturing. actually, it's only in guatemala city, but it was conceived, designed and made in america. the world's largest christmas tree-- 8,300 branches, over 1.5 million l.e.d. lights, all timed to music driven by computers. housed in a semi-trailer inside

the 57 foot base. a world class tourist attraction worth millions to the central american beer company that paid for it. its logo sits right up there on top. >> basically, think of this christmas tree as the bellagio water fountain up on a christmas tree. we do not keep stock. macy's will come in and say, "we want a bunch of elves, but we don't want them dressed this way." >> reporter: nick barrango is the technology expert at barrango corporation of south san francisco, california, a preeminent player in the $2 billion-a-year visual merchandising business. >> we create props, decorations, displays for stores, shopping malls, amusement parks, any commercial properties. >> reporter: this all started right after the san francisco earthquake. a newly-arrived italian immigrant named barrango, a sculptor by trade, started making mannequins, the most lifelike anyone had ever seen. but it turns out the real gold was in holiday displays, and, for over 100 years, barrango has

been manufacturing them and classic carosels for retailers around the country and the world, from boston to burbank, from berlin to beijing. yes, they ship to china, but they don't make it there. >> we've had the opportunity to go to china and have things manufactured, but we're a quality, hands-on family, company, and we need it to be in america in order to produce what we've got. we can't just turn it over to production in another country. >> reporter: it is that quality- first mantra, along with its global reach, that squired barrango through the recent downturn. that, and agility in the marketplace using the internet as a sales tool and technology to drive new products. >> a new take on an old product, where the lights are all computer-controlled and synchronized to christmas music. ♪ >> reporter: an american domestic manufacturer embracing

technology, selling globally, with quality at its core. ho, ho, ho. mike hegedus, "n.b.r.," south san francisco, california. >> tom: making an innovation from an idea to a business takes investment, time, expertise and money. jeremy levine is a partner at bessemer venture partners, a venture capital firm. with us at the nasdaq in new york. jeremy, you work with young companies across the globe. how does american innovation stack up against its international competitors? >> i think it's the best in the world. in fact, i think there's no comparison. the number of big companies that have emerged in the very recent history in america just dominates that of any other country and i think that's evidence that american innovation is as strong as it's ever been. >> tom: what are the ingredients, though, that you see necessary for that fertile innovation economy to be sustained over the next several years if not the next generation

or so? >> well, in many ways it's easy. it's almost self-reinforcing. the basic idea is that as companies go from nothing or startups to larger enterprises the many people who become part of that success get inspired by the leaders, or the founders, and some subset of them decide to go start their own companies. so the more success you see in the innovation economy the more success they'll get. other countries don't have that benefit because they have many fewer examples that they can look to. that's america's advantage. >> tom: there's been some criticism we don't see new big break throughs like we had during the industrial revolution or the information revolution. we're seeing more application of technology as opposed to new technology being innovated. >> yeah. i think on some level it's a fair criticism. my own firm dates back to the success of carnegie steel and one of the founders of carnegie steel essentially founded our group to invest in additional innovative companies. and back then the development of steel manufacturing at scale

enabled the creation of all sorts of things from metal which was fundamental and i suppose on some level we don't see that today. on the other hand, there are many sort of scientific or technical breakthroughs that contribute to applications as people learn to use them over time. facebook as an example isn't particularly technically innovative but it le regs all the computing power and data storage capability that had evolved from a number of scientific break throughs overtime. so i think it's fair to say that, you know, applications are less obviously innovative than a fundamental breakthrough but just as important. >> tom: give us an idea of an industry you think is poised for some of that breakthrough innovation. be it either transformative or application. >> i think one of the areas we're most excited as as investors is watching software innovations that have been applied to large companies for decades now increasingly to consumers to all these new easy-to-use and access applications and that will spread to another set of constituents, namely small businesses.

they have been left behind in many ways. they haven't been able to access this stuff, it's either too expensive or not tailored for them. you'll see a wave of companies applying ideas to help small businesses get more efficient andin access these new tools. >> tom: a positive reinforcement psychle with jeremy levine partner at bessemer venture partners. >> susie: for some final thoughts on american business and innovation, here's harry lin. he's executive-in-residence at idealab, a technology incubator in pasadena, california. >> it's fashionable in some business circles to criticize a lot of what passes for "innovation" these days as snake oil. after all, collateralized debt obligations were a financial innovation, and look what that's brought us. in the tech world, a lot of what gets touted as "innovation"-- mobile phone apps that let you find cheap beer or audio headphones that cost 300 bucks because they've got a celebrity's name on them-- may be clever, but they're hardly the stuff that made thomas edison and the wright brothers legends. still, when you look at the global picture of business

innovation, a strong case can be made for america's continued dominance. we have our continuing appetite for risk and ventures and startups, something that other nation's businesses lack. for the most part, we celebrate diversity, creativity and bushwhacking; not homogeneity, coloring within the lines, and repeating the same-old, same- old. if there's a reason to temper this bullishness, though, it's our tendency to focus more and more on short-term gains rather than long-term sustainable growth. amazon and apple are great examples of innovators that look past the next couple of quarters when they make their decisions. if more u.s. businesses behaved that way, our seemingly natural inclination toward innovation stands a better chance at keeping us ahead. i'm harry lin. >> susie: and that's "nightly business report" for monday, january 21, martin luther king, jr. day. have a great evening, everyone. and you, too, tom. >> tom: good night, susie.

we'll see you online at www.nbr.com and back here tomorrow night. captioning sponsored by wpbt captioned by media access group at wgbh access.wgbh.org cer:

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